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Dubai debt could prompt further bank downgrades

Dubai World restructuring plan could hit UAE banks’ ratings even harder, says S&P executive.

March 8, 2010 5:36 by

By Emily Meredith, Trends magazine

Dubai World’s expected restructuring plan could force the downgrade of several UAE-based banks which have heavy exposure to the troubled government conglomerate, a risk analyst said Monday.

“What is very clear is the banks in Dubai are largely exposed to Dubai World and there are also some Abu Dhabi banks that are significantly exposed,” said Emmanuel Volland, director of Financial Institutions Ratings at Standard & Poors, on a teleconference from London. Volland added that it is “obviously premature to comment on what would be the resolution” of Dubai World’s debt restructuring plan.

Standard & Poor’s released a report on the Gulf banking sector in which it put a negative outlook on one-third of the banks.

“We’ll continue to monitor the situation, and based on the outcome of the resolution of Dubai World we would act and move our ratings,” Volland said, noting that a decision by the government-backed company to repay its more than $20 billion in loans over a longer time period – a so-called ‘haircut’ – could trigger a further ratings downgrade.

Additionally, Volland said the rate of non-performing loans could reach ten per cent by the end of the first quarter of this year, as loans are restructured or reclassified.

On Sunday the Financial Times reported that Dubai World would approach its creditors with a restructuring proposal that would likely be paid over a longer term than outlined in the initial loans.

Yesterday, Moody’s ratings agency downgraded seven UAE government-related companies, citing the lack of a formal agreement from Abu Dhabi that would financially obligate the sovereign to support the companies under all circumstances.

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